Good day and thank you for standing by. Welcome to Yum China Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Ms.
Michelle Shen, thank you. Please go ahead.
Thank you, Davina. Hello, everyone, and thank you for joining Yam China's Q2 2021 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Hua and our CFO, Ms. Andy Yoon.
Before we get started, I'd like to remind you that our earnings call and investor presentation contain forward looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these forward looking statements. All forward looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with SEC. This call also includes certain non GAAP financial measures. You should carefully consider the comparable GAAP measures, reconciliation of non GAAP and GAAP measures is included in our earnings release.
Today's call includes 3 sections. Joey will provide an update regarding recent developments in our Q2 2021 results. Andy will then cover the financial performance in greater detail. Finally, we will open the call to questions. You can find the webcast of this call and the PowerPoint presentation, which contains operational and financial information for the quarter on our IR website.
Now I would like to turn the call over to Ms. Joey Hua, CEO of Liang Chen, please?
Thank you, Michelle. Hello, everyone, and thank you for joining us today. Our business has recovered remarkably well, Although the pandemic is still impacting our business and we'll continue to do so, we have learned to live with it And we are focusing on the future. We focus on our core, the food, great value and customer experience. We penetrate further into lower tier cities.
We increased our store network density to suit the shift to off premise dining Post pandemic, KFC remains resilient and continues to grow at a very fast pace. Pizza Hut achieved stellar performance and expected to become another growth engine of Yum China. Kobi and Joy Lavazza are making good progress. We delivered a solid second quarter. System sales grew 14%, Operating profits grew 83%.
We expand the store footprint at an accelerated pace, Opening 404 new stores in the quarter. In less than 1 year, we add more than 1,000 net new stores and increased total store count to over 11,000. Our team is laser focused on driving sales. Our powerful digital platform enable us to swiftly adjust our marketing campaigns. We can reach members directly with targeted offers.
In the quarter, we recruit over 10,000,000 new members, ending the quarter with over 330,000,000 members. Notably, off premise and home consumption are becoming more popular in the post pandemic era. Our delivery sales grew over 60% compared to 2019. We also launched retail products across our brands, leveraging our online and offline assets. We intend to learn and innovate to address evolving consumer needs.
Let me update you on our core brands. First, let's start with KFC. TFC led our new store openings. We increased store density in existing cities and entered over 100 new cities in the last 12 months. With 280 new stores opened in the We now have over 7,600 stores across China.
More impressively, new store cash payback and profitability remains very healthy across city tiers. System sales grew 14%, led by spring store sales growth and accelerated new store openings. KFC successfully navigated the tough operating environment with reduced volume at transportation and tourist locations. Our operating profit grew by 50% to 240,000,000. It goes without saying the crucial role Gufuhr plays in our business.
In the second quarter, KFC adds the wahoo and angers beef burgers to the permanent menu. KFC also launched the Bodang, and are well received by consumers. We know our consumers well and cater to local taste buds. KFC has introduced regional menu items such as hot dry noodles, and steamed dumplings, zhongbao in Hangzhou. We also launched a sea trans spicy, Plant based beef breast and oatmeal latte to provide more choices to consumers.
With our Good Food, we also offer great value. Throughout the quarter, we launched attractive promotions to drive traffic. Our main Labor Day holiday bucket are the first ever mix and match bucket for dining locations. On the digital front, we focus on growing our member base and driving that spending. We launched a new privilege subscription plan, giving our members the choice of perks from a range of offerings.
This provides flexibility for our members and drive incremental sales. We sold 8,000,000 privilege memberships In the quarter, the average spending of our privileged members doubled that of regular members. Now let's move on to Pizza Hut. Our transformative initiatives in the last 4 years have yield great results. Compared to pre COVID levels in the February 2019, same store sales continue to recover.
System sales growth turned positive. Operating profit more than doubled from the same period last year. We accelerate our new openings and add 17 net new builds in the first half of this year. This is the highest total net new units we add in the first half since twenty sixteen. It shows our confidence in the business model.
Hub and Sports and other small store formats have proven to be successful and now account for most of our new stores. Store economics continue to improve. New store paper remains healthy, in particularly for the hub and small stores. We will continue to increase density and penetrate into more new cities. In the March new menu, We changed 40% of the menu item compared to the previous year.
In the Q2, we continue to In June, we upgraded our hand tossed dough With more premium flour and low temperature long fermentation, this makes the pizza dough crispy outside and soft inside. It tastes particularly good and very, very suitable for delivery. We also launched sirloin steak with Parmesan cheese and nice live noodle, not a very Translation, but the Chinese name is called bao saumian. It's a traditional specialty noodle of Shanxi province. This is a great fusion product combining elements of East and West.
To enable value proposition And enhance our value proposition, Pizza Hut has expanded the price range of its pizza offerings. In June, we launched 13 new pizza flavors at more affordable price points, mainly for the new upgraded hand tossed stove. We also launched And now that's a best for all you can eat campaign offering abundant value, the Pizza Hut membership reached a significant milestone of 100,000,000 members. Member sales now account for over half of system sales. Digital and technology continue to play an important role In driving sales, digital ordering increased to 84% of sales from just 29% 2 years ago.
Delivery and tableside mobile ordering became more popular. Coffee. Our coffee business is making good progress. Lavazah, Fribble is store count, although the base is abysmal, in the second quarter. Initial results of our new store opening are encouraging.
We now have 14 Nevada stores in Shanghai And we are opening our 1st beautiful store in Hangzhou, which is the 1st store outside China in about for 1 hour today. We are confident in the potential of this 126 years old Italian coffee brand. Copy and Joy doubled its per unit sales compared to 2019 and had a meaningful number of So it's breaking even at the end of the quarter. We are reinforcing a specialty coffee brand positioning, expanding daypart with more food choices, broadening the customer base and have better value for money. To conclude my assessment, we are well positioned to capture the market opportunities in China.
Our store network is growing at I'm confident of pace. We are investing ahead to qualify and future proof our infrastructure and digitization. At Yum China, we are committed and confident to achieving sustainable growth in many years to come. With that, I'll turn the call over to Andy. Andy?
Thank you, Zoe, and hello, everyone. Let me now provide additional details on our Q2 financials and then share our perspective on this year's outlook. Unless noted otherwise, all percentage changes are before the effects of foreign exchange. Let me first cover our 2nd quarter financial results. Total revenue grew 17% year over year and reached $2,450,000,000 System sales increased 14%, led by same store sales growth of 5% and accelerated new unit development.
Similar to last quarter, we are providing pro form a measures here for convenient comparison with 2019. Same store sales recovered to approximately 94% of the Q2 2019. The system sales grew roughly 9%, benefiting from new units and the consolidation of Wangzhi Wang. Sales were recovering in April May, but the trajectory was disrupted by the Southern variant outbreak in Guangdong province at the end of May. Global Province is the largest economy in China and one of the largest markets, Housing 2 of the 4 Tier 1 cities, the outbreak led to temporary closures in the region and affected consumer behavior across China.
Same store dining volume is still well below 2019 levels, while off premise occasions continue to grow rapidly. KFC remained resilient and delivered robust growth. On a year over year basis, system sales of KFC grew 14%, led by strong unit growth and same store sales growth. On a 2 year basis, system sales grew an impressive 7%, It is at 2% faster than the Chinese restaurant industry growth of 5%. Despite the fierce traffic at transportation and tourist locations, same store sales recovered to approximately 93%, With the same store profit at approximately 86%, average ticket grew roughly 8% versus 2019, mainly due to the increase in delivery mix.
Pizza has delivered exceptional performance. On a year over year basis, system sales grew 16%, same store sales grew 11%. On a 2 year basis, system sales growth in the quarter returned to positive. Same store sales recovered to approximately 97%, a 2 point sequential improvement from the Q1 2021. It was led by a 9% increase in traffic, driven mainly by more delivery and breakfast sets.
Restaurant margin was 15.8%, up 2 10 basis points compared to last year. This was mainly driven by sales leverage, favorable commodity prices and operational excellence. Cost of sales was 30.7%, 220 basis points lower than last year. Commodity prices declined by 7% year over year, mainly helped by lower poultry prices. Cost of labor was 24.2%, 150 basis points higher than last year.
This was mostly Due to lapping of COVID related government subsidies received in 2020 and cost inflation inflation of 3%. Labor productivity and labor shortage partially offset the increase. Occupancy and order was 29.3%, 140 basis points lower than last year, Mainly attributable to sales leverage, savings in operating costs, G and A expenditure increased 10% year over year, mainly due to higher compensation costs, consolidation of Suzhou KFC and the resumption of some business travel. Operating profit grew to $233,000,000 a 65% increase year over year or a 6% increase compared to 2019. The increase was mainly driven by system sales growth and restaurant margin improvement.
Our effective tax rate of 24.8 percent is similar to last year. We expect full year effective tax rate to be 27% to 29%. Net income was $181,000,000 Adjusted net income was $185,000,000 Excluding $5,000,000 net investment gains, it was $180,000,000 up 55% year over year. Diluted EPS increased to $0.42 from $0.34 a year ago, despite enlarging our share base by roughly 11% as part of our secondary listing in Hong Kong last year. Now let's turn our attention to the outlook.
As we continue to drive sales growth and accelerate store network expansion, We need to be mindful of the near term challenges. It may sound like a cliche, but we continue to expect The impact of 2019 to linger and that would be periodic regional outbreak. So full recovery of same store sales to pre record level will take time. Sales recovery will continue to be uneven and nonlinear, impacted by a few factors: 1, subdue traffic at transportation and tourist locations. 2, some health measures and restriction on mobility to remain in place that will continue to impact daiying traffic.
3, shortening school harvest. Operating profit and margins have improved year on year. In the first half, benefiting from sales leverage, favorable commodity prices, Moderate wage increase and labor productivity improvement. We expect certain tailwinds to turn into perhaps Headwinds in the second half. 1st, cost of sales, which will be pressured by our focus on value campaigns And increasing commodity prices.
We have already seen an uptick in poultry prices and will lap the low prices in the prior year. Therefore, the commodity prices will potentially turn into inflationary pressure later this year. 2nd, cost of labor. Cost of labor will increase in the second Half of 2021 for two reasons. First, most of our stores have increased restaurant staff ranges in June July.
Therefore, wage increase will be higher in the second half compared to 3% in the first half. 2nd, we are also increasing staffing levels to ensure customer services. As a reminder, the speedy recovery last year creates a tougher comparison in the second half of this year. Now despite these challenges, we remain confident in the long term potential of China. We're accelerating store network expansion with increased store density to capture Market opportunity as we better serve the shifting demand to off premise.
We now expect to open around 1300 will start in 2021. We also will incubate our emerging brands for future growth. To support this growth, we will continue to invest ahead in technology and infrastructure to further solidify our competitive position. We now expect full year capital expenditure of approximately $700,000,000 to $800,000,000 As we set up investments, restaurant margins as well as G and A will reflect higher depreciation costs. Finally, following an assessment of the COVID situation, our financial position, The Board has approved the resumption of share repurchases.
There's over $690,000,000 remaining under the current authorization. We are committed to drive long term returns for our shareholders. With that, I will pass you back to Michelle Please stop the Q and A. Michelle?
Thank you, Amy. We'll now open the call for questions. In order to give as many people as possible the chance to ask questions, Please limit your questions to 1 at a time. Sabina, please start Q and A.
Please standby while we compile the Q and A roster. Our first question comes from the line of Michelle Zhang from Goldman Sachs. Please ask your question.
Hi, Joe, Yandi. Congrats on for the very good results again during this environment. My question is about the labor cost and also the new guidelines on government to protect delivery riders' interest. So we all understand that Yangtze has been taking So I still want to see your management's thoughts on the future labor cost management. And more specifically, even we have Hi, Gavin.
It's Hans Christian from Delivery Business. So how should we think about the delivery cost increase due to government's requirement? And also, since we are also talking about the delivery of 3.0 to enhance the efficiency, so like can we expect some efficiency up to offset this potential cost increase? Thank you.
Hi, Michelle. This is Andy. Let me first give you some color on the cost of labor. As we have mentioned in prior quarters, We were facing labor shortage in some of our restaurants. And then we also have It's going to moderate our wage increase over the past year because of the pandemic situation.
Now we have decided early on in the second quarter to increase wages at our market in the for the restaurant staff. And so as I mentioned on my prepared remarks, We have increased wages in June July in China. So Obviously, we rolled it out, as I mentioned, over the 2 month period across China. And so and as a result, we do expect that The ratio increase will be higher. And so we're talking to 7%, which is going to be Roughly normal to returning to the free quote level of wage increase.
And so as a result, as I mentioned, We should expect higher COL in the second half because of the wage increase. Now of course, we as a company, we always want to pay our staff more high salary and high wages. We always thought that we're focused on also maintaining profitability and delivering value for our shareholders. Therefore, we have to invest Over the years, and then we'll continue to invest in technologies, include our efficiencies in operations, Investment in affirmations, so that we can continue to drive that labor productivity improvement. So hopefully, in the long run, we can continue You pay our staff more at the same time, we think a reasonable gross margin for our business.
Thank you, Andy. Michelle, I've just had one comment about the labor cost and then I'll address your question on write, Rider Labor Law and Delivery 3.0. We increased our delivery sales mix from 11% to right now over 30% since 2016. And I think you can see from our P and L statement that we manage To manage the overall delivery rider cost and also to find a saving to fund that and also to continue to deliver the profit margin for our shareholders. So we have done it in the last 5 years as proven in the numbers, and I believe that And we also give you some view about what we'll continue to do that in the near future as well.
So let me address the rider labor law For the rider labor law question, I would like to make 3 comments. One is, We are compliant to applicable laws and regulations, and we also require our service provider to sign a Yum China supplier code of conduct to ensure they are legally compliant with all applicable laws and regulations. 2nd is Regarding the rider safety, we have a very comprehensive delivery management system, clear guidelines, and we conduct regular audits to ensure for safety and rider safety. Of course, we also provide our rider training and equipment with safety measures. 3rd, very important, we actually work with our service provider to manage riders' intensity.
Our riders, unlike other riders in the market, they are dedicated to serve only Yum China brands, So PSE Pizza Hut. And we focus on service quality. And one thing rather different, which we have been criticized in the As for now, I think we can see the beauty of it is our order density for rider is roughly 30% lower and the platform. So you asked the question, so how do we make sure we pay the rider well so that we can Keep them well. We pay our riders more per transaction.
They got paid a bit more money. So net net, the pay the pick home pay for the rider is competitive. On top of that, our riders enjoy stable income with less stressful work intensity. In the short term, it might sound like a disadvantage to our cost. But remember, as I mentioned earlier, we manage the cost okay.
But that's absolutely right thing to do for the long term with happier riders, better service quality and protect our brand in the long term. So let me move on to your question about delivery 3.0. We upgrade our rider platform in 2020 to optimize our delivery trade zone and rider routing. As of right now, this Platform covers 75% of KFC store and by the end of 2021, we will complete the rollout for all the KFC stores. At the same time, we are on top of we share the rider within Few stores or few KC stores within the trade zone, we are also Trying and going through the testing phase to share the rider with Pizza Hut as well.
So all these work will continue in 2021. We do expect The improvement in the trade zone optimization, the routing will result in improvement improving in rider cost. Of course, there are more to be done as delivery business continues to grow, But the progress is good. Thank you, Michelle. Thank you, Joy.
It will be very clear.
Our next question comes from the line of Xiaopo Wei from Citi. Please ask your question.
Good morning, Joey and Andy. Can you hear me?
Yes. Yes. Yes, Xiaobin. Go ahead.
Thank you. My question is on Pizza Hut. We are glad to See the strong recovery both in sales and the margin in Pizza Hut. As we know that cattle dining has been very difficult segment for years for everybody. According to the public information, while a few of your competitors actually did a very weak Performance in the kind of dining sector, but you guys really surprised the market on the upside.
I know that Julie and team have done a lot for the Pizza Hut The past 4 years of products, delivery, innovation, etcetera, what do you think is the most important factors that can be leading to the surprise on upside? And why it suddenly take off? And how long this kind of recovery, strong recovery can be sustained? Thank you.
Thank you, Xiaopo. Well, I would say there's no sudden recovery. It's really the hard work Of last 4 years, but it's hard to translate, but I think the Chinese way called is a good way to describe it. You work on it for over 4 years, day by day on all the key areas. And then finally, we get to the Impression point that the results start to speak for itself.
Let me comment on The path so far we have taken, but also what is next. Well, I think it's fair to say that our 4 year revitalization program have new great results Almost in all the key dimensions from same store sales traffic, Same store sales, system sales, margin, operating profit and right now new store opening, they're all Trending to the right direction. I'm not going to repeat the number, which you all have. We if you remember, when we start the journey, we had a very bold goal to turn The same store sales positive within 24 months, and we did. We delivered that.
We turned the same store traffic positive first, then same store sales. And in terms of which particular In a little clear, we like to say there are few focus. In reality, when we come to turnaround business, I have to be honest that we have to work on all areas. There's no such philosophy of just focus on 1 or 2 Better. And we roughly categorize them into 4 pillars, the fundamentals, delivery, digital and so format, which you guys should be More than familiar, if not more, with the repeat focus.
So all of them Have delivered. But if I really, really impressed to single out 1 or 2, I would have to say is the Great food with great value. As simple as that, food right now is fantastic with great value for money. My reasons favorite chicken curry or curry vegetables, It's hard to imagine that, but that's national dish or British before. And then the pizza has improved a lot, Not only the topping, but the dough.
Right now, as of now, we are having pizza topping that's with baozi and kenyo. So that's the Apaloni sauce with Wagyu beef, and that's Michelin Star recipe. But the price is very, very good. So that has to be A key attraction and turnaround. On top of that, we have really worked hard to improve the technology, of the digital ordering and then the delivery, etcetera.
So I'm not going to go through all the detail about the 4 pillars. What I would like to comment is what's next. Well, we now have confidence in the Pizza Hut business, and We are very clear that we want to make it another solid growth engine. What is next? Well, you guys are familiar with that too.
The next is resilient and high growth. We won the Pizza Hut business as resilient as KFC business So that it makes money during good time, but it also makes money during bad time. That's the best way to protect the jobs of our staff. In this big market. And also now we have good Good value for money.
We also have found a way with the new store opening has industry leading Cash payback and install profitability, that's even comparable to that of KFC. What a fantastic thing to have, particularly for the satellite store and new store and small store. Therefore, you can expect we are going to Pursue high growth for this very profitable store to pursue Profitable growth now and in the future. So focus on 4 pillars in the last 4 years. Going forward, we're going to focus on resilience and growth, in particularly profitable growth.
Thank you, Xiaopo.
Thank you, Jun.
Our next question comes from the line of Chen Luo from Bank of America. Please ask your question.
Hi, Joey and Andy. Again, congratulations on another strong set of results. I also have some follow-up questions on Pizza Hut. I noticed in the announcement, Joey described Pizza Hut as another growth engine. We have not seen this level of confidence on Pizza Hut in the past few years.
And just now, Joe, you also elaborated on a lot of Q3 regarding Pizza Hut. And in particular, I noticed that Joey mentioned that for those satellite stores, the payback Could be similar to that of KFC. So can you actually elaborate on the unit economics of those satellite stores? And also among the 1300 store addition target this year, can we offer a rough breakdown Between our brands such as KFC, Pizza Hut and other brands? And also lastly, in terms of margins, Is it fair to say that we can our medium term normalized restaurant margin for Pizza Hut Could possibly return to the level that we saw during the years of 2017 or 2018 before we started to turnaround the Pizza Hut business.
Thank you.
Okay. Thank you. I'll comment on the Pizza Hut Conference and then the payback for the stores and then Andy will address the other two questions that you asked. I hope you can see our increasing confidence on our business on our Pizza Hut business in the last 4 years. But we did take the prudent approach, and it's very clear what are the steps that we have taken.
Traffic first and then sales and then profit. And when we get The point that we can get all 3 down, we will go more. It's just like As I mentioned in previous earnings calls, sales is vanity, profit is vanity, and we like both sales and profit. What is even better is even more profit, right? So that's the growth that come in.
The confidence of the Pizza Hut business model, it does not come from 1 or 2 quarter positive results. It comes from the fact that we have been working very hard on improving fundamentals of the business. The pain of working on the fundamental is good things does take time. And the joy of the fundamental improvement is the benefit is long lasting. It will help our business model for the many years to come.
It's not because of 1 off promotion or It's because the improvement in food, value for money, store, look at few I mean the majority of our stores is very, very nice looking right now. I mean, unfortunately, you guys cannot see it because It's very difficult for you guys to come from to travel from Hong Kong to China. I really look forward for your visit to our new stores. It might be a bit So the improvement at all fronts And the technology and now the customer like it. And last year, the challenge on COVID-nineteen further Challenge our business model.
And we took the challenges positively and with great results. To give you an example, Last year, with a big impact on our dining business, our Pizza Hut business took the opportunity To make the virtual out of necessity to use our existing ingredient to make very High value fruit such as 1 person near Yirengsi and that right now is bringing in incremental Sales, because our party size traditionally has been big, but the one person meal is incremental business to Pizza Hut. And also because of the pandemic, we push ourselves to grow the new retail business. Not only we deliver cooked steak, but we also sell raw steak marinated raw steak that yourself Or your IE cannot get short. So all these are the result of hardware in the last 4 years and particularly last year.
And therefore, we are at a point that We can be very responsible with our view that we believe Pizza Hut It's another growth engine. Given the size of the store, right, we have over 2,400 stores of Pizza Hut and in over 500 cities with fantastic brands, particularly in casual dining business. So that's the fundamental. And for the payback, For this most of particular hub and phosphor, which is the business model I introduced to our shareholder investor back to 2019 March. So much lower investment.
It really supplement our current Pizza Hut store density. It also Help to make our current Pizza Hut store, which are not too small, Make it a real asset because the original stores will be what we call mother stores. These are the big stores and they will be helping to open the pit store, which has the satellite store to provides better convenience to our customers, focusing on off premise consumption. So now The satellite store together with our original Kensho dining store is fantastic network. It's a great way to grow our business.
It's not like we have to go to we could go very far away and we're just putting 1 satellite store and logistically it's very difficult. No, We have stores there already. We have potential dining stores there already. We're just going to increase the density of our stores to help us deliver our off premise business. And when I say the cash payback is good as compared both to KFC and Our numbers show that the success rate is very high because the investment is very low and the payback is about 2 years.
So that's fantastic.
Okay. So, Lawson, hi. Let me address the question about the 1700 new deal that we are looking at for this year. I think if you look at The first one, I think, obviously, somewhat similar to before, mainly KFC is a very strong Power for machines, it continued to generate very strong cash payback. So we should continue to expect very robust growth for KFC and it's going to continue to be the lion's share of the new software.
As Jade mentioned, we continue to gain confidence in the economics for Pizza Hut And then especially for the satellite store and the small and small format, so you should see some acceleration on Pizza Hut's new store openings in the second half as well. We also You have probably and Joey has mentioned on her prepared remarks, we have seen obviously There's strong consumer reception for Lavaca. We tripled in our store count, almost tripled From about 5 stores to 14 stores in the Q2. So Yes. I mean, we also have a number of stores in the pipeline.
So you should also expect Lavasta coffee business to be a driver. And then historically, the Chinese cuisine business, half half business also would see an uptick in store opening in the second half. So That's generally the composition of the 1500 store. But again, like I mentioned that usually The store opening will be probably faster in the second In the latter part of the year. So that's generally the trend for the Chinese New Year.
And so it's not completely linear, but that's generally You should see the acceleration in the store growth, saw new store openings. Now in terms of Pizza Hut Margins, I think we're very pleased with Pizza Hut's improvement. As we mentioned, it's not only improved as strongly SSG, system growth, a month on average traffic. And then so the biggest driver obviously for margin improvement You self leveraged. And so the other part is for and also, Liverpool will see the improvement in the strong economic model.
And so if you look at the first half though, we did benefited from, as I mentioned, 2 factors: 1, low commodity prices, Right. And 2, we have some like more moderate labor cost increase. That's the freight that That helped improve the margins in the first half. Now in second half, I think Similar to you can't see and because we have rolled out stage increase across China in June July for our restaurant staff. And so you should And also likely to increase hiring as well.
So you should expect an increase in labor costs there. And then the other part is that we're obviously, commoditize it to be less favorable and more favorable in the first half. Commodity is down 7% year over year. So and I think we have seen, for example, FONGJI prices, Which is low in Q1 and then have been rising since. And so We do expect that commodity prices also would do some pressure there and then perhaps turn into You know, inflation pressure year to year.
But those are the long term happening that we face. But I think for Pizza Hut, We have continued to drive I think there's probably for them obviously to drive traffic, drive sales back to the store. We're still at the recovery phase for the pandemic. So the number one thing for them, obviously, is cutting the focus on Making sure that customer will come back to the store, come back to you and then increase spending, And then we will continue to drive that positive improvement as business returns. And then And then we also look into driving that long term profit improvement of Pizza Hut, But that should be a longer term point of view.
It shouldn't be being as immediately as we strive to decrease profit. So in terms of the news economics, I think, I think a couple of things are like, one is that a small The stall are generally smaller. The satellite stall is more stall as the name would imply. So the throughput per stall For New South, probably lower than the East also existing portfolio. However, the public market is good and then we have lower our other investment.
So the overall return is very strong. And as Joey mentioned, for a satellite store, it's almost comparable to what they have to compete. So that's very strong return. So hopefully that we've done the address, your question.
Yes. Thank you, Joey, and this is really helpful.
Our next question comes from the line of Ang Lin from Jefferies. Please ask your question. Hey, thank you very much. Most of my questions have been answered, but just one follow-up question on the cost side. Andy, you mentioned about The cost increase for commodity as well as labor.
In the past, you shared with us that in terms of quantifying it, for example, the beginning of year 2021, you mentioned about labor cost increase by mid single digit. Now we are into second half. Maybe I have missed it, But would you share with us the cost increase for commodity side, labor cost as well as SG and A? And also maybe a breakdown in terms of the CapEx for the $700,000,000 to $800,000,000 CapEx, which is the revised number? Thanks.
Okay. Hi, Ann. So let me address the first question about Commodity price and wage increase. Commodity prices, I think if you look at the first half, we benefited from The lower commodity prices by almost 10% year over year. As I mentioned, We have seen commodities, especially poultry prices, have which is, I guess, the recent low in the Q1 and have been rising.
And then so we're going to see less benefit, much less benefit of the lower commodity prices in the Q3 compared to the first half. Now we obviously, the commodities are very hard to predict, But your current trends suggest that based on the contract prices and whatnot, suggest that maybe perhaps in later part this year, The commodity prices could turn from a favorable 7% year over year inflationary pressure Due to an inflationary pressure, right? So that's our near term outlook for commodity prices. Now in terms of labor costs, in the first half, our wage increase was about wage cost Compared to last year, it was a 3% increase. As I mentioned, we have decided to adjust our restaurant staff Wage.
And so we have rolled out that wage increases in June July, and that is about approximately 10% of the year Increased there. So that's the second part of that. And then the third part, I think, for the cost of labor It's twofold. One is that, obviously, the delivery will give you the higher mix of that. And then If you look at the hiring, I think we also have mentioned over the past few quarters that there are some labor shortage and hopefully with You know the salary ambition increase over there would be that situation as well.
So we're going to increase hiring. Now obviously, as Shri mentioned, we continue to Look for ways, savings to pay for that. And then we'll continue to do so in the second half to look at all the business improvement, How we can better utilize our IT technologies to help that. And then as Jerry also mentioned, We continue to try to improve our brewery operation as well and drive efficiency. So but that's a short term outlook for us in terms of both COS and COOF.
Now the second question is about the $700,000,000 to $800,000,000 CapEx for this year. I think, obviously, the lion's share of that It's going to be in new store, Nubian, and then the same part is going to be For MOLONG, MOLONG continues to be an important part of our tax program. We want to keep our restaurants fresh. And So we generally have a pretty robust modeling program. And then the third one, obviously, is investment Our IT and Infrastructure and then those are sort of like The main categories of our spending, roughly in backlog.
And then in terms of G and A. G and A. G and A, yes. So obviously, on a year over year basis, G and A, one is we will have less common way to update. Last year, as you remember, There was some reduction in the Social Security insurance payment for workers in China, and so that has expired.
The other part is that, obviously, we also have moderate salary and ratio increase, compensation increase for our staff. Yes, that one and to stand on, I hope we don't forget that last year, we have 2 acquisitions. One of the consolidations of our senior operation, the other one is the acquisition of Wangji Wang. Both of them, we would absorb that G and A And then finally and then last year, because of the pandemic, we basically would have stopped With all the business travel and with the improvement in the current situations, there will be some We turn to some, not all, but some return to some business travel. I think that's Normal path and hopefully that gives you some ideas about the expense and cost environment that we're facing right now.
Thank you, Ed.
Thank you.
Our next question comes from the line of Lillian Lu from Morgan Stanley. Please ask your question.
Thanks, Joey and Andy for the very detailed explanation. I have A question on the new store expansion because I think so far you've been doing a very good job in terms of managing both very fast to store expansion and margin improvement. So I just want to understand more in detail about the increase of Store density impact to the existing stores, does that have any impact on the same store sales growth of the existing stores? That's one side. And the other side is, yes, the payback and return of new store Quite good.
So how are we going to look in the future with continued store increase, especially we uplifted the target again. What kind of dynamic we should look at in terms of the new store margin and also the impact to the existing stores? Thank you.
Hi, Lillian. Well, thank you for the questions. Obviously, we are very pleased with the pace of So opening, we with that, we continue to capture the market opportunity that this presents you at, Especially in the lower tier cities, but also allow us to better serve our Existing markets, and we have the desired, as we mentioned, our cell network in the existing market so that we can increase the density and better serve Customers' need for delivery and takeaway. So Obviously, when you open a new store, especially increasing the density, it's natural to see some sales transfer. New store opening, but that also the impact is not the same everywhere.
And today, if you look at the FSG impact, I think the pandemic obviously is the most important one right now. The sales overall, as I said, sales overall is quite sensitive to, for example, some of the regional outbreak as we have seen In the Q1 and as we have seen in June, and so we have always asked analysts and investors to Sort of like pay attention to regional operators we are. We don't need to be overly alarmed by that, but we need to Because our experience tell us that periodic regional outbreak is to be expected. We have seen that in December, January. We have seen that in June, in Guangdong.
Now We're seeing a potential outbreak here in Nanjing and that is still in that we saw the situation. So as what is driving SSG, there's many impacts, many, many factors there. But again, like going back to the main point here, which is some. So yes, for lower TCE, there will be some impact. If you look at lower TCE overall, the FSR growth is actually faster, right?
So And for some urban areas, I think as we design our network, one thing that What impact SG is to reduce that delivery trade zone. So for example, if you have a store that was 5 kilometer before. Now you're going to shrink it to 3 kilometer because we want to have better delivery services And whatnot. And so that would naturally with that increased density, we're able to cover that that we're able to do that to serve our customers better. But that would naturally Meaning that we have to change some of the trade offs of some of our existing stuff.
So but I think Would that have like an impact on SG and A? Probably a little bit. But is that the right thing to do? Absolutely. And especially when we look at Some of these changes that have been accelerated by COVID-nineteen, one of them stand out is Obviously, grocery sales, right, off premise consumption or at home consumption.
So this is something that I think when we mentioned the store opening and SSG, I think it's something that To be aware of. The other one is what's the other one here? Payback in the future with increased target.
In the store market.
In the store market. So if you look at our store opening, we always have a very disciplined Process. And that has been so for past many years and then it's completely so and will In the future. That's why when Joey mentioned we're going to try to accelerate growth, she put a special emphasis on profitable growth. And so and then if you look at our payback period for both KFC and because There have been variable buys and then stable for KFC roughly 2 years and for Pizza Hut roughly 3 to 4 years.
And as So you mentioned, we're also on the smaller store and satellite store nowadays, the payer fee could be even stronger than that. And so we'll continue to do that, maintain balance between faster growth to capture market opportunities to best serve our customer, But also maintain our policy discipline to both possible growth.
Thank you, Andy. Really, I just want to add 3 color to 3 highlights to your question. First of all, We would really like to reiterate our focus on system sales growth in the short term and the long term Because this is not a mature market yet. It's still a developing market with huge opportunity to open new stores. We are only in 1600 cities in China, and there's still a few 100 cities for KFC and then 1,000 cities for Pizza Hut.
So let's look at the system in the short term and long term. And margin, we always Have the balance on the profitable margin growth. And I would like to add 3 things. One is, In the past few years, both KFC and Pizza Hut, particularly KFC, we have made ourselves very flexible. And that flexibility is part of resilience for us to open store to open more store within the gap of existing store And to open more stores in the new cities.
I'll give you a few drivers here, Andy mentioned, and I would just like to touch upon it. Well, the sign in traffic is the deal right now. It probably will stay. We see that. Therefore, what are we doing?
We try to grow incremental growth From the data, for example, late night, Shenyang, it's a chicken bone from Shenyang. It's fantastic new product innovation that really drive the sales of the late night. Is it enough To fill the gap of the dyeing, no. But for now, the dyeing business is Challenging probably to say, but we see the opportunity to grow incremental business. We also see the opportunity in regional menu, which we We have not further explored opportunity.
For example, the Wuhan Le Guanyin, It's not only selling well in Wuhan, actually it's selling even better in Jiangxi and Shenzhen because For Wuhan people in Jiang Tian Zeng, KFC is the only place that they can buy the Leoganyan, Quastra Noodle. So and we also started new retail that's across all the brands. That is fantastic incremental business To delivery business as well as off premise business. So that's internal internally, we become neigong, right? Internally, we More flexible, stronger that allow us to take advantage of more store locations, open more stores.
Well, Secondly, we have become a better tenant. If you think about last year, what happened is we are one of the very few Retailer food retailer that can continue to pay rent and we cannot lay off any people. Tenant, whether you're good tenant or not, it's decided by the landlord. And the landlord might not really Like us and if not love us, particularly in the lower tier cities, we are a clear Traffic driver and enter tenant and the rent that we are getting at lower tier city is fantastic. And that helped the economic of the new store opening.
And now we also have become more clear with our new franchise Strategy, the channel franchise strategy, the remote area franchise strategy, so that We are helping our franchisees to open more store in the area that we can still do it, but It's not as efficient as for the franchisee to run the operation locally in the remote area. So with the 3 combined factors, we believe that we can continue to pursue system sales, which is a combination of profitable new store opening and the recovery of SSG. And then also protect the margin because it will not be right For our shareholders in the short term and in the long term, if we buy market share, we don't. It's a discipline. We only pursue profitable New store growth with industry leading cash paper and in store profitability.
Thank you, Lilian.
Go ahead.
Please go ahead.
Okay. Our last question comes from the line of Christine Feng from UBS. Please ask your question.
Thank you, Joey and Andy to share so many colors on your company's Ladies' operation as well as managing the source towards many questions investors have been asking the analysts about. So I have a question regarding the coffee business. I think Joey mentioned briefly about the latest The operation is about Lavazah Coffee and Enjoy. I remember when I was in China at the end of last year, I visited the store of Lovaza in your office. And when I look at some of the commentary on the On social media platform, I realized there has been a lot of changes to Lovato's newly operated stores in China compared with one I visited end of last year.
So Joey, maybe can you share with us more colors about the latest progress you're making to Lovaza, especially how you think about the long term positioning of the brand compared with existing competitors such as Starbucks? And If you can share with us some of the financial details such as the economics, that would be even more appreciated. Thank you. Thank you, Christine. I hope one day you got it you can try our Wuhan Le Gangian and see whether you like it as a Local person, compared to the coffee data, let's take a step back.
We have 3 coffee brands in Yum China, K Coffee, C and J and Avaza. I'll come to Avaza I'm very happy to report K Coffee for 2021 first half. We increased The sales of coffee per cup by as much as 30% compared to the pre pandemic 2019 number. And that shows that our focus on good coffee at affordable price It's a viable strategy. Good for the coffee business, good for KFCs in stock sales, right?
T and J, we have been working on it. Now we have 38 So we've been very transparent that we are learning the operation side of a business, of a new business. We have huge respect towards new business, and I'm happy to report that we are there because A meaningful number also will be breaking even by end of this quarter and more will be by end of year end. And that allow us to build The people, business is about people. With some good people, there's no business.
So we build our operation people And we become sharper with our marketing positioning and pricing, etcetera. And these learning are all helpful very helpful When it comes to the experience of building Nevada brand in China, it takes much less time compared to C and J for us To get the operation right, to get the marketing right and also with our fantastic partner, the VASA's help To get the food right, to get the Italian flavor of the whole environment, the food, the drink, etcetera. So Lavana said, Andy said it earlier, I'm going to emphasize, we are going to have Accelerated pace of development for the second half of the year compared to first half. So first half, we moved from 5 stores to today's 15 stores, mainly in Shanghai and now 1 store in Hangzhou. So For the second half, we have we will accelerate the opening pace and we'll enter into more cities in China.
So that's in terms of footprint. And in terms of business model, right now, we so far In Shanghai, for the 14th store, we have half of the store, what we call large store to build the brand. And then the other half, either smaller, slightly smaller store or a mini store, these are the stores with much better economics to make the money faster. So a combination of flagship store to build a brand and then smaller store to build a sales, That seems the right thing to do and we are very happy with the initial results. So that's the second.
3rd is we already Encouraged by the initial result and working on daypart, menu combo, delivery and others. Our off premise sales mix right now is over 50% for Lavaz's store. And that's good, right? Because we know that right now, the off premise is the trend. And for Lovaza, obviously, finally, my comment is the positioning is premium.
It's authentic Italian style coffee With a nice environment, we believe that Chinese consumer can have a choice, can have an alternative other than one single choice in this beautiful premium coffee segment. So that's what we are right now, and we cannot wait To see more beautiful stores, which is fantastic. I suppose it's hard to get Our Italian partner to produce bad Italian food, and we are not complaining about it. So we really look forward to have opportunity for investor and for analysts to try our elavance and coffee more cancer in China. Thank you very much, Christine.
And hopefully, Hong Kong one day, by the way. Thank you.
Thank you, Christine. Before we end today's call, please note that we will host a virtual Investor Day on the morning of September 23, Shanghai Tang. We will announce more details as we get closer to today. With that, we will conclude today's call. Thank you for joining, and have a great day.
Thank you.
Thank you, everyone. Thank you, operator.
This concludes today's conference call. Thank you for participating. You may now disconnect.